Thursday, February 21, 2013

Here's an idea ...

Let's treat health insurance like any other form of consumed good, and let the market bring prices down the way it has brought down the prices of virtually 100% of the goods it has been allowed to act on.

That's so crazy, it might work!

The latest voice of reason making this "radical" suggestion is David Goldhill, the man who wrote the provocative article "How American Healthcare Killed My Father" in The Atlantic in 2009. In his recent NY Times article, Goldhill notes:
In the world of health care analysis, there are basically two schools of thought. The first is that health care is so fundamentally different from other goods and services that a normal market can’t drive down its prices. This school of thought makes a number of assumptions: health care consumers are desperate and have no leverage to avoid high pricing. An individual’s need for care depends on luck and genes, so that social fairness requires pooling risk.

An aging population needs ever more care. New technologies offer beneficial advances but only at great expense. For-profit motivations conflict with fundamental human needs, requiring extensive regulatory oversight. Managing the insurance system requires costly and complex administration (with direct annual administrative costs now running at roughly $1,900 per household).

AN alternative to the conventional wisdom is that consumer ignorance is what differentiates health care from other industries. This results in a lack of discipline that allows for pervasive excess care and exorbitant prices. If people understood how much they were paying for health care, they would insist on greater control of these resources, creating incentives for the kind of competition in price and quality we have seen develop in other industries — even those that were once assumed to be too complex for the average consumer to readily understand, such as personal computing.
Every time people who don't understand or don't trust the free market (a category that encompasses most Liberals) claim that some innovation or technology is too complex for the hoi polloi to understand (or, the market "doesn't work with X"), the great unwashed masses inevitably surprise their would-be masters with their ingenuity and grasp of the fundamental value of the innovation or technology at issue. The market, which is really nothing more than the aggregation of each individual's preference for a given item (as expressed in the price s/he is willing to pay for it), inevitably works magnificently to bring the price of said item down to a reasonable and affordable level.

It does this, that is, when it is allowed to. When regulations or laws forbid the market from working, that's when you get all kinds of perverse incentives and dysfunction. Capitalism is based on the fundamental truth that humans are greedy and self-interested, and the free market works when everybody's individual greed and self-interest leads them to openly and transparently offer goods for exchange in a way that all parties feel is beneficial enough to justify paying for/parting with their goods or resources. But when you have artificial barriers -- price controls, laws forbidding selling across state lines, mandates on the bundle of goods a company must sell, etc. -- that's when the greed on which capitalism is based can overwhelm the system.

In healthcare, this is exactly what has happened. Insurance companies game the system by overcharging. Governments get wealthy off of insurance companies, pharmaceutical companies, and specialist associations (like the AMA) lobbying them to pass all kinds of legislation and regulation favoring them. That just doesn't happen in a free market, but the average health care consumer is insulated from this reality because they don't pay directly for their healthcare.  That fact is the straw that stirs the drink of American health care dysfunction. No other part of this broken system would be sustainable or possible if people paid for most of their care directly.

Again, here's Goldhill with a great analogy explaining why:
Try to imagine what homeowners’ insurance would look like if we expected everyone’s house to burn down and then added coverage for each homeowner’s utility bills and furniture wear-and-tear. This would be insanely expensive without meaningfully reducing anyone’s risk. That, in short, is how health insurance works.
The article really is worth a read.  Check it out.

No comments: